WASHINGTON (Reuters)- The U.S. economy grew a bit faster than first thought in the first quarter as demand for foreign goods fell and commercial building picked up, adding to evidence that the United States may stave off recession.

The Commerce Department said on Thursday that gross domestic product grew at a 0.9 percent annual rate in the first quarter. While sluggish, that marked an upward revision from the anemic 0.6 percent rate estimated a month ago and an acceleration from the fourth quarter's 0.6 percent gain.

The revision reflected a narrower trade deficit as more domestic spending went to U.S.-made goods, which helped offset a reduction in business inventories. Nonresidential building activity was stronger than first reported as well.

The data, which was in line with economists' expectations, could help persuade the Federal Reserve to shift its focus to inflation from flagging growth. The U.S. central bank has lowered its key interest rate by 3.25 percentage points since mid-September to combat the economy's housing-led slowdown.

"The underlying domestic demand in the economy showed slight improvement. It's probably consistent with the Fed being on hold in June and several months after that," said Nick Bennenbroek, currency strategist with Wells Fargo in New York.

The dollar was higher after the data, while Treasury debt prices fell and stocks rose. The blue chip Dow Jones industrial average .DJI closed up 52 points, or 0.4 percent, as investors took heart in the data and a drop in oil prices.

JOBLESS CLAIMS RISE, RETAIL MIXED

A separate report suggested the labor market remains soft, but is not deteriorating sharply.

The Labor Department said the number of first-time claims for jobless benefits edged up last week, while the tally of workers still drawing benefits after an initial week of aid hit its highest mark in more than four years in the prior week.

The GDP revisions follow a flurry of other recent economic data that has been better than expected and has raised hopes the economy could skirt recession.

On Thursday, Costco Wholesale Corp (COST.O) the biggest U.S. warehouse club operator, reported a 32 percent jump in quarterly profit as shoppers flocked to its stores for discounts on food and gasoline. But Sears Holdings Corp (SHLD.O) reported an unexpected loss.

Economists expect the second quarter to be the most difficult period for U.S. growth as high food and gasoline prices and the ongoing housing correction saps consumer spending power. But tax rebates of up to $600 per adult that began reaching consumers at the end of April are expected to provide a lift, as are new tax breaks for business investment.

"Data reported so far point to continued expansionary growth in the second quarter," said Sam Bullard, an economist at Wachovia in Charlotte, North Carolina.

STILL WEAK

While economic growth was a touch stronger than first estimated, the report still reflected big pockets of weakness.

Consumer spending rose at a slim 1 percent annual rate, the smallest gain since the second quarter of 2001, and home building plummeted at a 25.5 percent pace, the biggest drop since 1981 and the ninth consecutive quarterly decline.

However, investment in nonresidential structures rose 1.1 percent. A month ago the department had estimated that commercial building activity fell 6.2 percent.

In addition, while export growth was weaker than reported last month, imports were as well -- and more U.S. spending went to U.S.-made goods, bolstering growth.

Those factors more than offset a downward revision to the level of inventories. Economists said the leaner inventories was a healthy sign for future growth, as new sales will be supported more by new production rather than by existing items on store and warehouse shelves.

In its first estimate of corporate profits for the quarter, the Commerce Department said after-tax corporate profits rose 3.8 percent after falling 3.3 percent in the fourth quarter.

(Additional reporting by Emily Kaiser in Washington and Steven C. Johnson in New York; Editing by Neil Stempleman)

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